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ASX revises Guidance Note 27 on Trading Policies

What you need to know

On 30 January 2015, the ASX revised its Guidance Note 27 on trading policies (Revised Guidance) in light of market developments since the last update in 2012.

The Revised Guidance makes it clear that the policy objective of trading policies is not only to minimise the risk of actual insider trading and market manipulation, but also to avoid the appearance of insider trading, as this can have a detrimental impact on the personal reputation of the employee, on the entity’s standing with investors and on the broader image of the ASX market.

The Revised Guidance is more detailed than its predecessor, outlining a number of additional points that the ASX recommends be addressed in an ASX-listed entity’s trading policy, including:

- putting the obligation to comply with the trading policy on a ‘firm legal footing’;

- extending policies beyond key management personnel (KMP) to include, for example, the next layer of management, KMP’s executive assistants and other staff who may be able to access their emails;

- including an ability to impose ad-hoc trading restrictions (although in practice, any policy with mandatory pre-approval for trades already provides this);

- imposing restrictions on trading in derivatives or on engaging in short-term trading and short-selling;

- imposing restrictions on the entry into margin lending or other secured financing arrangements by KMP; and
- ensuring that the trading policy articulates a clear procedure for clearing trades.

ASX-listed entities should consider reassessing their trading policies in light of the Revised Guidance to ascertain whether they adequately cover the ASX’s recommendations and if not, whether there is a sound justification for not doing so (noting that the minimum requirements for a trading policy contained in ASX Listing Rule 12.12 remain unchanged). New entities listing on the ASX should ensure that their trading policies comply with the Revised Guidance to the extent practicable.

This update outlines the key amendments to the Revised Guidance and includes a checklist for assessing the degree to which your trading policy complies with these requirements.

The Revised Guidance in more detail

Putting the obligation to comply with the trading policy on a ‘firm legal footing’

The ASX has emphasised the desirability of ASX-listed entities putting the basis for requiring compliance with a trading policy by each person covered by the policy on a ‘firm legal footing’. The Revised Guidance recommends that this be achieved by including a requirement in the employment contracts it has with its KMP and employees who are covered by its trading policy that they must comply with the trading policy. If the trading policy extends to cover family members and related entities of KMP, it is recommended that the KMP’s employment contract also include a requirement that the KMP must ensure that such family members and related entities are aware of the trading policy and comply with it. This is also worth noting for appointment terms of non-executive directors.

Persons covered by a trading policy

ASX Listing Rule 12.12 requires that at a minimum, an entity’s trading policy must cover KMP (who are persons having authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly, including any director of that entity). The Revised Guidance states ASX’s expectation is that KMP will typically include all directors, the CEO and all employees who report directly to the CEO.

In addition to KMP, ASX recommends entities to consider whether to extend trading policies to staff who work closely with, or near, KMP, their next line of reporting personnel and those staff who may have access to their emails or other information (such as IT staff).

Ad-hoc trading restrictions

Consistently with the previous guidance, ASX recognises there are two main ways of restricting trading: either by defining specific “trading windows” during which trading may occur or defining narrower “closed periods”, when trading is prohibited other than in exceptional circumstances.

While the choice of approach is left to each entity, ASX suggests that for entities which adopt trading windows, the typical length of time would be 4 weeks but that a narrower time period may be relevant if the entity is very large or has very liquid trading in its securities or is more likely to be in possession of information being withheld from continuous disclosure under a carve out in LR 3.1A.

The ASX has stated that it strongly encourages entities to reserve the right in their trading policies to impose ad-hoc trading restrictions in circumstances where the entity is considering matters which they are considering disclosing under the continuous disclosure regime in ASX Listing Rule 3.1A.

Entities can do this in their trading policies:

if they prescribe trading windows, by providing that the entity can impose a restriction on trading during any period, including one that would otherwise fall within a permitted trading window; or

if they prescribe black-out periods, by providing that the entity can impose a restriction on trading during any period, in addition to the fixed black-out periods in the policy.

However, the ASX has stressed the importance of keeping the imposition of ad-hoc trading restrictions confidential to avoid speculative trading. The ASX has provided examples of how this risk can be managed, including by:

requiring KMP and other employees covered by the trading policy to seek a clearance for any trading in the entity’s securities, regardless of whether the trading falls within a permitted trading window or outside a black-out period (which in our experience is already quite common). This way ad-hoc trading restrictions can be imposed on a case-by-case basis without the need to communicate the ad-hoc trading restriction more widely; or

limiting the communication of an ad-hoc trading restriction to people directly involved in or who have knowledge of matters being considered under ASX Listing Rule 3.1A.

Imposing restrictions on trading in derivatives, short-term trading and short-selling

The ASX has indicated that it is prudent for an entity’s trading policy to extend to trading in derivatives, short-term trading and short-selling. The Revised Guidance states that trading in derivative products poses at least the same and potentially greater risks as trading by KMP in its securities as such trading allows for larger insider trading plays for a smaller outlay in a less visible market.

Similarly, short-term trading and short-selling have a speculative element that may be seen as an indication that the person engaging in such activity is taking advantage of either positive or negative information that has not been released to or fully absorbed by the market. Furthermore, short-term trading and short-selling by KMP may give the market a negative message that the KMP’s interests are not aligned with long-term investors or that the KMP has a low level of confidence in the prospects of the entity.

Hedging transactions

The ASX has recommended that the Corporations Act prohibition on KMP of an ASX-listed entity from entering into arrangements that have the effect of limiting their exposure to risk relating to an element of their remuneration that has either not vested or has vested but remains subject to a holding lock be reiterated in the entity’s trading policy, and should also be applied to other employees covered by the policy who receive share entitlements as part of their remuneration, despite this not being prohibited under the Corporations Act.

Margin lending and other secured financing arrangements

The Revised Guidance also states that an ASX-listed entity should consider prohibiting entry into margin lending and other secured financing arrangements in its trading policy, to prevent the default of such arrangements causing a lender/financier to sell some or all of the securities to cover the default. At a minimum, the ASX has suggested that a trading policy should include a requirement for KMP and other employees covered by the policy to notify senior management of such arrangements so the entity is not caught unaware if there is a default.

Clearance to trade

Listing Rule 12.12.4 recognises that there may be exceptional circumstances in which KMP are to be permitted to trade during a prohibited period with prior written clearance. In the Revised Guidance, the ASX has recommended that the person who is authorised to give such clearance should be someone in a position to know whether market sensitive information may be released imminently and should have a good understanding of the laws governing insider trading or is otherwise able to seek advice on this issue. The factors that the person should consider in exercising their decision include not only to minimise the risk of insider trading, but also to avoid the appearance of insider trading and the significant reputational damage that this may cause. The trading policy should also state that:

any clearance to trade can be given or refused by the entity in its discretion, without giving any reasons;

a clearance to trade can be withdrawn if new information comes to light or there is a change in circumstances;

the entity’s decision to refuse clearance is final and binding on the person seeking the clearance; and

if clearance to trade is refused, the person seeking the clearance must keep that information confidential and not disclose it to anyone.

Checklist – Best practice for what should be covered by a trading policy

Area

Guidance

People to whom the trading policy should apply

KMPs;

family members and entities closely connected to KMP; and

other employees who work in close proximity to KMPs or who come into possession of market sensitive information ahead of release to the ASX.

Compliance matters

Entities should make it clear to KMP and employees that they are subject to the terms of the trading policy by incorporating the obligation in their employment contracts, by giving a copy to new starters, by placing a copy on the entity’s intranet, by conducting trading programs, by circulating reminders and by requiring periodic sign-off by KMP and other employees covered by the policy that they are aware of the obligations under the trading policy.

Trading restrictions (time)

Trading policy should contain either ‘trading windows’ or ‘blackout periods’.

Trading policy should also reserve the right for the entity to impose ad-hoc trading restrictions that can be exercised without hesitation where the entity is considering releasing market sensitive information under ASX Listing Rule 3.1A. The trading policy should also ensure communications of such ad-hoc trading restrictions are appropriately managed, see paragraph 2.3 above for more detail.

Trading restrictions (types)

Trading policy should cover:

- trading in the entity’s securities, being its shares or debentures, options over unissued shares or debentures and renounceable or unrenounceable rights to shares;

- trading in securities of other entities (where the person is acting on the knowledge of information acquired through their position with the entity).

Clearance of trading

Trading policy should include a procedure to clear trading during a prohibited period in exceptional circumstances. The procedure should:

- give the power to authorise trading activity to a person who has knowledge of whether market sensitive information may be released imminently and who has a good understanding of the laws governing insider trading or otherwise is able to seek advice on this issue;

- outline the factors that a person should consider in exercising their decision to approve a trade, including the broader implications that a perception of insider trading (even where no insider trading would be committed) may have on the entity’s securities and the ASX market; and

- state the matters set out above at paragraph 2.7 to make it clear that the decisions of the person to refuse such a trade is final, binding and confidential.

Knowledge and awareness

Trading policy should give some context around why the policy has been adopted by explaining:

- the laws prohibiting insider trading and directors and employees using information acquired in that capacity to gain an improper advantage for themselves or someone else; and
- the ramifications for the entity and its directors and employees if those laws are breached or perceived to have been breached.

Disclosure of trading policy

ASX strongly encourages entity’s to publish an up-to-date version of their trading policies on their website.

Entities should also lodge any changes to their policy with ASX. The ASX in this respect will receive any such lodgements even if it might not consider the changes to be material.

Enforcement of trading policy

The ASX has strongly emphasised that entity’s should regard a breach of the trading policy as a serious matter that warrants an investigation as to the circumstances of the breach, including depending on the circumstances, imposing appropriate disciplinary or remedial action.

The ASX has indicated that one remedial action that may be taken is to require the person who has sold securities in breach of the policy to donate any profits earned to charity. Similarly, any person who has acquired securities in breach of the policy should be made to sell them at the earliest opportunity they are able to under insider trading laws and donate any profit earned from the sale to charity.

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